“A lot of charities are ‘really strapped’ and will be ‘for the foreseeable future,’” says Elizabeth Keating, a lecturer at Boston College who focuses on nonprofit issues.

This quote caught my eye in a recent article in The Wall Street Journal by Jennifer Cummings. As nonprofits struggle to rebound after plunging in 2008, they realize donor scrutiny will be heightened, perhaps forever, or until we’ve experienced increasing confidence in the economy for a few more years. More specifically, the Giving USA Foundation says, “Charitable giving isn’t expected to return to pre-crisis levels for five to six more years.”

The Journal article further explains philanthropists will be engaging in more due diligence than usual, which speaks directly to the importance of putting your own financial practices to the test before a donor does.

Some of the activities reported to be part of a donor’s research are:

Digging into the charity’s financial statements

Visiting the organization

Meeting the management

Talking to third-party observers

If this list doesn’t grab your attention, consider the recommended in-depth analysis below. At Execute Now!, our clients benefit from exceptional leadership and training in how to carry out reporting, financial statements, projections and other useful tools. Furthermore, the management and staff are proactively involved in our systems and reporting guidance so they’re informed and can speak knowledgeably with their board, finance committee and potential stakeholders. In other words, our clients can confidently pass the financial test with flying colors.

Start with the 990, which can be found in Guide Star or the Foundation Center.

Look at net assets shown on Line 22 and net loss shown on Line 19.

Evaluate the mix of revenue sources (government, private, etc.). Too much government support may be a red flag in light of recent federal funding developments.

Determine if financial statements are audited (not required in every state). Check all affiliated nonprofits so you get an accurate picture of the organization’s breadth and financial health.

Look at the “notes section” at the end of the audit. This contains a helpful narrative about the report.

If you’re not producing an audited report, ask yourself why because your donor no doubt will ask as well. Have you or a board member looked at your recent 990s in the areas described above and considered the story they tell? Prepare answers for each of the sections and share them with your board so they understand the nuances of your financials.

Building financial capacity

Cummings also highlighted a particularly interesting case where the executive director of Triad Foundation, a family foundation based in New York, was “losing faith” in the financial stability of a local charity it had supported for years. The recipient seemed stagnant due to its lack of growth in community support in spite of the continued sizable grants the foundation was making. After further research the foundation director learned the nonprofit was, in fact, losing donors and hadn’t done an audit in two years due to the expense.

A gift targeted at financial leadership turns things around

Instead of discontinuing its support, the foundation made one last grant—twice the amount it traditionally gave—aimed at bringing in auditors and consultants. “The donation helped turn things around for the charity, which is now merging with another local group,” reported Cummings. At Execute Now!, we have first-hand experience with this kind of capacity building grant. Because foundations are beginning to realize just how central financial health is to the organization’s mission, funders have begun to focus their dollars in this area. Watch for more on this topic in future posts when we highlight how these grants develop and support the backbone of a charity’s operations.

I encourage you to borrow the donor action items from this article and put your nonprofit to the financial test before your funders do. It’s going to be a long journey toward economic confidence and your new stakeholders need transparency in order to re-build the trust you’ve come to count on.